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Iconic Gibson guitars under threat as company files for bankruptcy protection

02 May 2018 - 15:11
Tiffany Kary and Emma Orr

Picture: REUTERS/SERGIO PEREZ

New York — Gibson Brands has filed for bankruptcy protection, with lenders taking control of the iconic American business that’s supplied guitars to BB King, Elvis Presley and Pete Townshend.

The Chapter 11 filing in Delaware on Tuesday keeps Gibson in business but gives ownership to noteholders, replacing stockholders that include CEO Henry Juszkiewicz, the company’s leader for more than three decades. According to court filings, current noteholders include Silver Point Capital, Melody Capital Partners and funds affiliated with KKR Credit Advisors.

The restructuring will allow the instrument business to "unburden" itself of a consumer-electronics unit that Gibson blamed for its financial woes. Gibson owes as much as $500m, and lenders will provide a new loan of up to $135m to keep the company in business, according to court papers.

Juszkiewicz, who has found himself at odds with creditors in recent months, will continue with the company on emergence from bankruptcy "to facilitate a smooth transition", according to the agreement. Court papers call for a one-year consulting deal and compensation package for Juszkiewicz. A representative for the company didn’t respond to questions about whether Juszkiewicz will remain as CEO or in a separate role.

Debt talks

A group of bondholders led by KKR-affiliated funds and advised by investment bank PJT Partners and Paul, Weiss, Rifkind, Wharton & Garrison had been pushing for a restructuring that would hand them ownership of the guitar maker and let them install new leadership. The group had declined to invest new funds in Gibson while Juszkiewicz remained in charge, Bloomberg previously reported.

Working with Jefferies, the company had sought a sale or recapitalisation, approaching 58 businesses and signing 27 non-disclosure agreements. Still, Gibson said it didn’t have enough capital to pay down its debt and get more time to strike a deal, according to court filings.

Gibson was engaged with negotiations with the creditor group in March, talks that ended because shareholders and KKR were "significantly divergent in their views regarding the appropriate consideration for the various parties involved", according to a company statement. The company had also been talking with other potential investors in hopes of receiving new money to refinance its debt and take out the existing creditors.

Failed diversification

Gibson, founded in 1894, sells more than 170,000 guitars annually in 80 countries. Its guitars are US-made, with factories in Nashville and Memphis, Tennessee, and Bozeman, Montana. It also sells studio monitors, headphones, turntables and other musical instruments. Units also include the company’s Baldwin Piano business. All told, the music instruments business employs at least 875 people, according to court papers.

Its Gibson Innovations business, which sells audio products, such as speakers, headphones, and DJ products, was the source of its financial woes, according to a court statement from Brian J Fox, an MD at Alvarez & Marsal who will serve as the company’s chief restructuring officer. Acquired through a leveraged transaction, the business faced significant sales declines due in part to a loss of credit insurance overseas. The unit will be wound down, according to a Gibson news release.

‘Music lifestyle’

Juszkiewicz bought the audio and home entertainment business from Koninklijke Philips in June 2014 for $135m as part of a bid to relaunch Gibson Guitars as Gibson Brands, a "music lifestyle" company. He also bought a line of consumer electronics from Japanese company Onkyo in his bid for diversification. But the purchases drained cash, and earnings plunged. The company ran out of time for a turnaround as a bond maturity and springing term loan loomed in July.

Management, creditors and consumers alike see strong potential for Gibson’s iconic music business, but challenges have abounded, beyond the ill-fated expansion into consumer electronics.

In recent years, Gibson faced tighter credit terms from its suppliers and growing pressure from new import regulations on rosewood, a crucial material for the company’s high-end instruments, according to S&P Global Ratings. Gibson had also developed a broken relationship with some retailers, a number of which have stopped selling the brand, citing unmanageable demands that range from annual credit checks to upfront orders for a year’s merchandise.

‘Exit path’

With the noteholder agreement, the company has "an exit path from Chapter 11 as a de-leveraged business, poised for continued growth," Fox said in the filing. The hope is that a more nimble, re-organised company will be able to address its problems and return focus to the core guitar business.

Fox described the electronics business as having become "trapped in a vicious cycle in which it lacked the liquidity to buy inventory and drive sales". Cross-defaults had threatened the musical instruments business, and the company has been working with advisers since late 2017 to try to solve the problem.

The company was able to reach an arrangement with major constituents to its musical instruments business, but not the consumer-electronics business, Fox said.

Said Juszkiewicz in a statement: "The Gibson name is synonymous with quality and today’s actions will allow future generations to experience the unrivaled sound, design and craftsmanship that our employees put into each Gibson product."